A stiff headwind (KOR)

May 15,2019

Beijing announced it will levy 5 percent to 25 percent duties on $60 billion worth of U.S. imports from June 1 in retaliation for Washington’s slapping of 25 percent tariffs on $200 million worth Chinese imports from Friday. The trade war between the world’s two largest economies expanded after a trade war truce broke off over the weekend. U.S. President Donald Trump indicated a deal was still reachable as he is due to meet with Chinese President Xi Jinping during the Group of 20 summit in Osaka, Japan, next month. Yet with Trump floating the idea of continuing negotiations after his own re-election, a lengthy battle is also possible.

The face-off has massive ramifications on the global economy. The two economies together account for 40 percent of the global gross domestic product (GDP) and 22.6 percent of global commerce. If the two economies levy 25 percent tariffs on the products they import from each other, their respective trade volumes are expected to shrivel by 25 percent to 30 percent in the first year, according to the International Monetary Fund (IMF). That would trim U.S. economic growth by 0.3 percent, to 0.6 percent, and China’s by 0.5 percent, to 1.5 percent. Global economic growth will also lose 0.2 percentage points. Fears of a prolonged trade war triggered a worldwide rout in stock markets.

The shock to Korea would be heavy as our economy is vulnerable to external headwinds. China imports 26.8 percent of Korea’s outbound shipments, with nearly 80 percent being intermediary goods that are assembled in China and exported to the United States and elsewhere. Korea would take a direct hit from reduced trade between the United States and China. According to the Korea International Trade Association (KITA), Korean exports could be pared by $870 million, or 0.14 percent annually. The financial and economic toll would be heavier when counting in unrest in the financial markets and delays in investments.

Korean investment sentiment is already subdued due to government policies that are not business-friendly. The universal enforcement of a 52-hour workweek and hikes in the minimum wage have hurt many employers. Companies that took their businesses overseas totaled 3,540 last year. The foreign direct investment has been declining. The Korean won’s tumble of more than 60 won against the dollar suggests a loss of foreign confidence. More dramatic actions must be taken to stimulate corporate investment. The government must remember that Korea Inc. plays the primary role in economic growth.